Blockchain is tagged as one of the up-and-coming technologies that will bring disruption to many industries and business functions, including supply chain management. So what is blockchain, and how and where can it be used?
Blockchain: What it is & how it works
Blockchain is mostly known as the technology behind the cryptocurrency Bitcoin. In the financial services sector, it has created huge buzz, and many established banking and brokerage institutions are experimenting with it. Going one step further, blockchain is a much more general technology that organizes a distributed digital ledger. Simply stated, it facilitates the decentralized and tamper-proof storage of transactional or contract data, which, obviously, can be leveraged in the supply chain realm.
Here’s how. Blockchain’s distributed nature eliminates the need for a central trusted party or broker. This allows companies to build completely new approaches to business networks. The blockchain protocol builds transactions in a cryptologically-secured sequence with timestamps. These records are then stored, decentralized, and replicated to deliver audit-proof trails, after which the transactions can be verified by all parties at any time. As result, a principal trusted third party is no longer required. Transactions are executed directly between two entities, and don’t need to pass through a main authority.
Potential use #1: Tracking goods and their characteristics
One potential use for blockchain for supply chain management purposes is to track goods and their characteristics. Where today’s serial numbers and/or lot numbers identify goods, they are often managed by the intermediary who currently possesses the product. Throughout the supply chain, numbers get changed, and the relationship between number and product is not always publicly visible. This lack of visibility is caused by multiple gaps that exist between the different systems within and across companies. Blockchain can do better: it can simplify, automate, and create trust throughout the process.
With specific products, having a publicly traceable and verifiable product genealogy is extremely valuable. For example, consumer packaged goods (CPG), medical devices, and pharmaceuticals are excellent candidates. The ability to provide proof of origin and guarantee non-tampering throughout their products’ lifecycle is key for companies in these sectors. Or consider the diamond industry, in which tracking the origins and lifespans of gems is critical to the fight against the sale and distribution of blood diamonds. Blockchain could also be deployed to battle counterfeit stones.
Potential use #2: Managing all that paperwork
Companies can also use blockchain to manage the tons of complex documentation related to international supply chain operations. Customs declarations, bills of lading, tax returns, packing lists, and safety and environmental summaries, and the list goes on and on can all be stored, certified, and accessed in a blockchain ledger. Even better? Blockchain can make these records easily accessible to managers around the world, reduce shipment waiting times, and even help prevent fraud or theft.
Potential use #3: Improve Visibility, Collaboration and Communication
Blockchain also has the potential to improve visibility, collaboration, and end-to-end communication in multi-tiered supply chains. In simpler terms, the technology can provide supply chain managers with a complete view of his suppliers of the suppliers of his suppliers. As global supply chains become more complex and incorporate additional intermediaries as companies scale their respective operations, this benefit can be particularly useful and insightful.
In all three of these cases, blockchain promises to deliver a secure, tamper-proof, and decentralized transaction network that can be easily accessed by all authorized participants. Additionally, these distributed supply chains become ecosystems with multiple parties coordinating activities between one another, but without a definitive authority or middleman.
A blockchain reality check
Now, before we jump to conclusions, and declare blockchain can make the world a super-organized, automated, transparent, secure and democratic paradise, it’s time for a reality check. At this time, blockchain is still in its formative stages, although it is enjoying a ton of buzz and hype for legitimate reasons, some of which I just outlined above. There’s a lot of talk about beta tests, future projects, and the world of possibilities. The hard truth, though, is there’s little use right now for blockchain in the production pipeline of the supply chain. That could change very quickly as the technology becomes more ubiquitous, and as companies further explore its utility and deployment.
It might just be a matter of time and of choosing the projects carefully, but to become fully mainstream, blockchain will need to overcome these current challenges:
- Even if there is no longer a central trusted party, companies still need to participate in choosing a network, which is also linked to a blockchain technology implementation. As multiple networks emerge, which is the right one to choose? Will the larger players require their partners to follow their choices?
- The security and transparency of blockchain transactions have flipsides. Due to the nature of their distribution and redundancy, they come at a cost: they require time to execute. This conflicts with some supply chain requirements which call for immediate responses or when huge transaction volumes are involved.
There are new emerging solutions that solve the performance challenges of blockchain, and even facilitate internetwork transactions. We can expect to slowly overcome these challenges in the next few years. For the time being, we should pursue those use cases which deliver transparency and security for slower transactions and in situations where the central party cannot be trusted. The ones mentioned above have these characteristics.
In conclusion, blockchain is a very exciting and promising technology worth monitoring. However, it is still a little too early in its lifecycle to make accurate predictions about its future. Its potential uses in the supply chain remain few, and it is not clear which of these will end up as the most valuable or efficient. Nevertheless, its possibilities are enticing, so there’s a strong likelihood that blockchain will emerge as a legitimate disruptor.